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Regulation and Compliance > State Regulation

Annuity Players Adopt Their Own Suitability Standards

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In September, California enacted a law governing the sale of annuities based on a model act drawn up by the NAIC. Eleven other states have done the same, all with the purpose of protecting consumers from buying a product they may not understand or need.

Political fanfare aside, what does this mean for carriers, advisors and the marketing organizations (FMOs/IMOs) that offer annuity products?

The consensus appears to be that increased regulation, while burdensome at times, is a good thingfor no other reason that it can streamline an approval process that varies widely between states and even carriers.

By some accounts, carriers and marketing organizations have gotten the message and put in place their own suitability measures even before the NAIC model was written in July.

Case in point: Allianz Life Insurance Company of North American, also in July, launched a new distribution platform for its fixed index annuity products that is open to only select FMOs. In order to exclusively market its Allianz 360 FIA, FMOs must meet certain requirements, such as a specified premium volume. According to Eric Thomes, senior vice president at Allianz in Minneapolis, the threshold is $75 million in annual Allianz annuity production. To date, 29 FMOs have joined.

That’s not the only requirement, however. Prior to instituting the Allianz Preferred initiative, the company started what it called a “focused FMO” program in which to join an FMO had to agree to place a field suitability officer in its shop.

This latest version takes the suitability angle even further: To join the Preferred platform, FMOs must also hire a field compliance officer and submit all their non-company-specific material distributed in the marketplace for review by Allianz to ensure it has the proper disclosures.

The Ghost of 151A

All this focus on suitability, Thomes says, is an outgrowth of the battle over SEC Rule 151A. Though the rulewhich attempted to make indexed annuities a securities productwas ultimately defeated, its effects still linger within the industry.

“When the SEC was proposing that indexed annuities be securities products, there was a lot of bright light shined on the product and the distribution [model] that sold those products,” Thomes says. “We’ve moved through that and we are now with the NAIC model suitability act.”

For carriers and FMOs, Thomes contends a focus on suitability only makes all annuity salespeople better. “It’s pushing them to raise the quality within their organizations,” he says.

Thomes also notes that with annuities becoming more mainstream, more oversight was bound to follow.

“From our standpoint as the largest writer of fixed index annuities for 10 of the last 11 years, we actually embrace it,” he says. “We put in suitability in all 50 states prior to this model suitability act, so we were ahead of that curve. One of two things can happen: You can either get ahead of that curve, because you know that wave is coming, or you can wait for that wave to come and try to play catch up. We prefer the former versus the latter.”

Similarly, Matt Neuman, a vice president of marketing for Advisors Excel, a marketing organization based in Topeka, Kan., reports that his firm hired an in-house suitability and compliance officer in 2009. He concedes, however, that internalizing the suitability procedures can be painful at first.

“There are some growing pains to it, but in general the process has allowed our agents to get more business approved in a lot shorter period of time,” Neuman says. “It’s also allowed us, the FMO, to be the primary point of contact. That is a big deal for us. So I think the most progressive marketing agencies are already doing this regardless of whether a carrier is demanding it or not.”

Neuman predicts more states will adopt the NAIC model suitability act, which, in his view, will make the application process more uniform among the 50 states. Although most of the talk has focused on consumer protection, advisors who sell these products will benefit as well.

“It will provide the advisors out there with clear-cut guidelines on what’s suitable and what’s not,” Neuman says. “That’s the difficult part. I’m working with advisors in all 50 states and it’s very different in Pennsylvania versus Illinois versus California versus Texas. The carriers are at different levels on what they’ll accept and what they won’t. You can’t run a business unless you know the guidelines. It will make things a lot more clear cut.”

Financial advisor Lance Howard, founder and owner of two companies, Howard Financial and Insurance Services, Inc. and Howard Financial and Wealth Management, Inc., in Bakersfield, Calif., says that heightened regulatory oversight, while it does increase bureaucracy, nevertheless will have a beneficial effect on the industry.

“Suitability has gone from a one-page form to a four-page form and it continues to make our job harder,” Howard says. “Yet I believe that the rules they are making are protections for consumers because unscrupulous advisors won’t police themselves. It’s a shame.”

Having a suitability officer in place also makes the sales process run smoother, Howard says. “[If] we have ongoing contact with a suitability person and they are doing their job then I think we’ll all have more information on what’s suitable and what’s not,” he explains. “It will give everybody an opportunity before they even put in the business to make sure they are submitting suitable sales.”

Neuman notes that other carriers “highly recommend” but don’t require that an IMO have a suitability officer in place, and if a marketing organization markets a specific carrier’s product, sales go through that carrier’s suitability department. Neuman adds that, to his knowledge, Allianz is the first carrier to mandate a suitability officer be in the marketing organization’s office as requisite to join their Preferred platform.

Like Howard, Neuman asserts that streamlined and unified regulations and suitability procedures ultimately enable advisors to sellfor want of a better phrasemore suitable products to their clients.

“Hopefully, we’ll get to a point a couple years down the road [when] there is a lot more standard suitability requirements amongst carriers and states, there’s a lot more clear-cut guidelines and everybody plays by the same rules,” Neuman says. “That makes it a lot easier for the advisor to do their job and select the best product [for the client]”


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